![]() ![]() The exception is for very seasonal companies, where sales are concentrated in a specific quarter, or cyclical companies where annual sales are inconsistent and fluctuate based on the prevailing economic conditions. High DSO ➝ Inefficient Cash Collection from Credit Sales (Less Free Cash Flow).Low DSO ➝ Efficient Cash Collection from Credit Sales (Higher Free Cash Flow).That said, an increase in A/R represents an outflow of cash, whereas a decrease in A/R is a cash inflow since it means the company has been paid and thus has more liquidity (cash on hand). Recall that an increase in an operating working capital asset is a reduction in FCFs (and the reverse is true for working capital liabilities). On the other hand, DSO decreasing means the company is becoming more efficient at cash collection and thus has more free cash flows (FCFs).Īs a general rule of thumb, companies strive to minimize DSO since it implies the current payment collection method is efficient. If DSO is increasing over time, this means that the company is taking longer to collect cash payments from credit sales. What is a Good Days Sales Outstanding (DSO)? Similar to the calculation of days inventory outstanding (DIO), the average balance of A/R could be used (i.e., the sum of the beginning and ending balance divided by two) to match the timing of the numerator and denominator more accurately.īut the more common approach is to use the ending balance for simplicity, as the difference in methodology rarely has a material impact on the B/S forecast. ![]()
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